RESULT UPDATE Arun Agarwal arun.agarwal@kotak.com +91 22 6218 6443 Summary table (Rs mn) FY18E FY19E FY20E Sales 2842322 3278593 3671201 Growth (%) 5.4 15.3 12.0 EBITDA 323,880 407,040 466,893 EBITDA margin (%) 11.4 12.4 12.7 PBT 118,362 147,741 180,451 Net profit 97,759 128,556 158,998 EPS (Rs) 28.8 37.9 46.8 Growth (%) 31.1 31.5 23.7 CEPS (Rs) 90.2 103.1 120.5 Book value (Rs/share) 199.8 237.6 284.5 Dividend per share (Rs) - - - ROE (%) 15.5 17.3 17.9 ROCE (%) 15.7 16.7 17.3 Net cash (debt) (340,890) (380,825)(314,210) NW Capital (Days) (23) (22) (22) P/E (x) 13.8 10.5 8.5 P/BV (x) 2.0 1.7 1.4 EV/Sales (x) 0.6 0.5 0.4 EV/EBITDA (x) 5.0 4.1 3.4 Source: Company, Kotak Securities Private Client Research TATA MOTORS (TAMO) PRICE: RS.396 RECOMMENDATION: BUY TARGET PRICE: RS.477 FY20E PE: 8.5X TAMO s 3QFY18 profits came in below expectation. JLR posted weak performance during the quarter with subdued volumes impacting revenue and margins. Higher depreciation, increased tax provision and lower profit from China JV further dented JLR s 3QFY18 profits. Standalone business performance was strong in the quarter with strong volumes and significant improvement in margins. We expect the standalone business to continue witness gradual turnaround in its performance. For JLR, YoY volume growth is expected to stay tepid in the near term. However, JLR s performance is expected to improve as compared with 3QFY18. We introduce FY20 estimates and roll over the target price to FY20E earnings. We retain BUY with revised price target of Rs477 (earlier Rs514). Standalone Quarterly performance (Rs mn) (Rs mn) 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) Revenues 161,016 102,054 57.8 138,878 15.9 Total expenditure 148,616 101,434 46.5 130,280 14.1 RM consumed 117,799 74,791 57.5 103,081 14.3 Employee cost 9,293 8,454 9.9 8,854 5.0 Other expenses 21,524 18,189 18.3 18,346 17.3 EBITDA 12,400 620 1,899 8,598 44.2 EBITDA margin (%) 7.7 0.6-6.2 - Depreciation 7,689 7,290 5.5 7,506 2.4 Interest cost 5,010 4,137 21.1 4,441 12.8 Other Income 919 940 (2) 1,419 (35) Exceptional income / (loss) 1,386 (449) (728) PBT 2,006 (10,316) - (2,659) - PBT margins (%) 1.2 (10.1) (1.9) Tax 169 143 18.2 294 (42) Tax rate (%) 8.4 (1.4) - (11.1) - Reported PAT 1,837 (10,459) - (2,953) - PAT margins (%) 1.1 (10.2) - (2.1) - Reported EPS (Rs) 0.5 (3.1) - (0.9) - Source: Company Standalone result highlights Standalone results during the quarter witnessed marked improvement YoY and QoQ. Revenue in the quarter was Rs161bn, higher 58% YoY and 16% QoQ. On a YoY basis, revenue grew on the back of strong volume growth in the passenger and commercial vehicle segment. Commercial vehicle volume grew by 35% YoY on weak base and improved demand. In the passenger vehicle segment, TAMO reported 20% YoY growth in sales volumes. In the quarter, company reported market share gains in both the segments. While gross margins remained almost similar, company derived benefit from improved product mix(higher commercial vehicle volumes), savings under the cost reduction program and operating leverage from higher volumes. On a per unit basis, employee cost and other expenses was down by 15% and 12% YoY respectively. Accordingly EBITDA margin improved from 0.6% in 3QFY17 and 6.2% in 2QFY18 to 7.7% in 3QFY18. EBITDA for the quarter was Rs12.4bn as against Rs620mn in 3QFY17 and Rs8.6bn in 2QFY18. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5
On the back of significant improvement on operational performance, TAMO reported PAT of Rs1.8bn as against loss of Rs10.5bn and Rs3bn reported in 3QFY17 and 2QFY18 respectively. JLR Quarterly performance GBP mn) (Rs mn) 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) Revenues 6,310 6,048 4.3 6,322 (0.2) Total expenditure 5,625 5,437 3.5 5,576 0.9 RM consumed 4,033 3,836 5.1 4,001 0.8 Employee cost 680 648 4.9 662 2.7 Other expenses (net) 912 953 (4.3) 913 (0.1) EBITDA 685 611 12.1 746 (8.2) EBITDA margin (%) 10.9 10.1-11.8 - Depreciation 546 409 33.5 478 14.2 Foreign exchange gain/(loss) 41 (62) - 69 - Net Interest expense 13 5 160.0 13 - Share of profit /(Loss) from JV 25 35 (28.6) 61 (59.0) Exceptional item 85 - - PBT 192 255 (24.7) 385 (50.1) PBT margins (%) 3.0 4.2 6.1 Tax 103 88 17.0 77 33.8 Tax rate (%) 53.6 34.5-20.0 - Reported PAT 89 167 (46.7) 308 (71.1) PAT margins (%) 1.4 2.8 4.9 Volumes (nos) 133,739 130,910 2.2 131,334 1.8 Realization (GBP) 47,181 46,200 2.1 48,137 (2.0) Source: Company JLR Result Highlights JLR reported weak 3QFY18 results. Revenues in the quarter grew by 4% and was flat YoY at GBP6,310mn. Volume growth in the quarter was tepid as the company witnessed decline in UK and North America. Average selling price declined YoY on account of run-out of Range Rover and Range Rover Sport. EBITDA margin in the quarter came in at 10.9%, improvement YoY but lower QoQ. Sequential decline in EBITDA margin was on account of run-out of profitable models (Range Rover and Range Rover Sport) and higher incentive. Company received GBP45mn incentive on China investments. Depreciation and amortization witnessed a sharp increase YoY and QoQ on account of new products. China JV profit came in lower during the quarter. Tax expenses were higher in the quarter on account of impact of reduced tax rates (in UK and US) on deferred tax asset. Lower EBITDA margin, higher depreciation, weak China JV profit and higher tax rate significantly impacted profits during the quarter. PAT declined 71% QoQ to GBP89mn. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6
Consolidated Quarterly performance (Rs mn) (Rs mn) 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) Revenues 741,561 639,330 16.0 706,907 4.9 Total expenditure 654,858 576,927 13.5 617,523 6.0 RM consumed 472,823 400,123 18.2 448,868 5.3 Employee cost 75,763 70,446 7.5 72,563 4.4 Other expenses 106,272 106,358 (0.1) 96,092 10.6 EBITDA 86,703 62,403 38.9 89,383 (3.0) EBITDA margin (%) 11.7 9.8-12.6 - Depreciation 55,708 42,300 31.7 49,699 12.1 Interest cost 12,474 8,707 43.3 11,473 8.7 Other Income 1,816 1,674 8.5 1,888 (3.8) Exceptional gain / (loss) (47) (7,085) 715 PBT 20,290 5,986 239.0 30,814 (34.2) PBT margins (%) 2.7 0.9 4.4 Tax 10,676 8,670 23.1 10,898 (2.0) Tax rate (%) 52.6 144.8-35.4 - PAT (bef minority int/associates pfit) 9,614 (2,684) - 19,916 Share of associates/minority Int 2,372 3,621 (34.5) 4,912 (51.7) Reported PAT 11,986 938 1,178.3 24,828 (51.7) PAT margins (%) 1.6 0.1 3.5 Reported EPS (Rs) 3.5 0.3 1,178.2 7.3 (51.7) Source: Company Consolidated Result TAMO s consolidated results came below expectation. While standalone business witnessed significant improvement; JLR s performance was weak in the quarter. Consolidated revenue grew by 16% YoY to Rs741bn. EBITDA margin improved YoY but was down QoQ. TAMO s consolidated PAT stood at Rs12bn, as against Rs938mn in 3QFY17 and Rs24.8bn in 2QFY18. Outlook TAMO reported considerable improvement in its standalone business. Strong volume growth in the commercial vehicle business helped the company witnessed strong improvement in EBITDA margin. In the passenger business, high volume growth led to operational leverage benefits. Company s focus on reducing cost paid off during the quarter. Going ahead, the company seems focused on growing volumes, improving market share and controlling cost. Company is working towards achieving break even (PBT level) in the passenger vehicle business. In the standalone business, management is aiming at achieving 6-8% EBIT margin over the medium term. JLR s volume performance has been subdued in certain geographies like US, UK and Europe. In the near term, YoY volume growth is expected to stay tepid given certain challenges like diesel tax in UK and market cyclicality. However, as compared to 3QFY18, we expect volume to improve as company has launched Range Rover and Rover Sport 2018 model year. Moving ahead, E Pace and I Pace will also support growth. At JLR, the company remains committed towards achieving EBIT margin of 8-10% over the medium term. Operational leverage from higher volumes, product mix change and reduction in hedge losses is expected to help the company improve EBITDA margin over 3QFY18. Management expects a strong 4QFY18 (over 3QFY18)for both Indian operations and JLR. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7
We retain BUY recommendation on Tata Motors Ltd with a revised price target of Rs.477 In view of below expected results and certain challenges to JLR s volume growth, we cut our FY18/FY19 revenue and profits. Our revised FY18/FY19 net profit estimates stands lower by 31%/25% respectively. We introduce FY20 estimates and roll over the target price to FY20E earnings. We retain BUY with revised price target of Rs477 (earlier Rs514). Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8
RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 12 months SELL We expect the stock to deliver negative returns over the next 12 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology sanjeev.zarbade@kotak.com ruchir.khare@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6439 +91 22 6218 6433 Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement, Building Mat FMCG, Media Metals & Mining Economy teena.virmani@kotak.com ritwik.rai@kotak.com jatin.damania@kotak.com kumar.jayesh@kotak.com +91 22 6218 6432 +91 22 6218 6426 +91 22 6218 6440 +91 22 6218 5373 Arun Agarwal Sumit Pokharna Pankaj Kumar K. Kathirvelu Auto & Auto Ancillary Oil and Gas Midcap Production arun.agarwal@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com k.kathirvelu@kotak.com +91 22 6218 6443 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 6427 TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com 91 22 6218 5408 +91 20 6620 3350 DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810 Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 15
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